Potential growth rate to fall below 2% by 2026

Korea’s potential growth rate, currently projected to be 2.5 percent, is expected to fall to below 2 percent by 2026 due to falling productivity and investment, a major private think tank warned.

A country’s potential growth rate is the maximum possible rate an economy can grow without triggering inflation.

The Hyundai Research Institute said in a report Sunday that the potential growth rate, currently projected at around 2.5 percent, will drop to the low 2 percent level between 2021 and 2025. That figure is projected to decrease even further to 1.9 percent in 2026 and 1.7 percent in 2031.

Unlike in the 1980s, when the rate of increase for facility investment reached around 10 percent on average due to high demand for exports, Korea has been suffering from subdued investment growth since the 2008 global financial meltdown, the report said.

The institute added that Korea’s potential growth rate is also suffering as the number of working age people is expected to fall. According to Statistics Korea, the workforce peaked at 37.6 million last year, but the number is expected to begin to fall this year.

The labor force shortage will be boosted by Korea’s aging population. As the population ages, productivity will be weakened and the level of investment and savings rates will fall as well.

The report also implied that a lack of new growth engines is hurting the potential growth rate. The manufacturing industry, which largely contributed to the high growth rate during the 1970s and 1980s, is still playing a large role for the national economy, and while the service sector started to play a bigger role in recent days, it has not grown fast enough.

Even though the country dedicated much of its effort into fostering R&D investment, that support has not made much progress compared to other OECD members, the report said. While the rate of investment per GDP into R&D was tallied at 4.6 percent for Korea in 2017, the highest level for OECD member countries, the number of patents per 10,000 researchers for Korea is way below the OECD average.

To cope with the slowing growth and negative forecast, the report advised the government to welcome more foreigners and expand economic opportunities for the elderly, thereby tackling the productivity fall. It said the government should allow more independence to educational institutions in fostering specialized talent while expanding continuing studies opportunities for all age levels.

To improve the falling investor sentiment, the report urged the government to ease regulations.

BY KO JUN-TAE [ko.juntae@joongang.co.kr]